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March 18, 2013

Ghana’s Fiscal Issues Are Temporary Glitch

Ghana’s inaugural $3.28 sovereign bond, issued in 2007, was a huge hit with foreign investors from across the globe eager to invest in the commodity-rich West African nation and encouraged by its sustained macroeconomic stability.

Fast forward to today, however, and Ghana, which held elections in December, is in the news for serious fiscal slippage. Fitch Ratings revised its outlook to negative on B-plus-rated Ghana, citing the severe deterioration in the country’s fiscal deficit to 12.1%, the funding of that deficit through high-interest borrowing on the local market, and the escalation of government debt to 47% of GDP from 31% in 2008.

“Ghana has a history of sharply increasing the budget deficit during election years,” said Carmen Altenkirch, the primary analyst covering Ghana at Fitch Ratings. “They had a very successful bond issue in 2007, but then in 2008, the budget deficit rose really high, only to be pulled back again the following year. We saw the same trend in 2012, so that in itself is concerning. But what’s more concerning is that they are funding the deficit in excess of rates of 20% in an environment where the inflation rate is 10%.”

Of course, one of the main reasons Ghana can afford to run such large deficits is because nominal GDP continues to grow at the rapid rate of 20%. Ghana’s oil and gold exports continue to bolster the economy, Altenkirch said. Both oil and gold production are optimally managed by the government, and exports of gold, cocoa and oil, which together make up 83% of exports, will help in eventually reducing the deficit and bringing the debt level back in line.

“In general, Ghana conducts macroeconomic policy very prudently,” Altenkirch said. “It has a favorable investment climate and a long history of political stability, so the fact the country keeps getting into trouble with the deficit is a concern for us, and it would be better over all if they managed the public finances better in order to avoid the adjustment costs they’re experiencing now.”

While there’s little doubt that Ghanian authorities have their work cut out for them, Ghana’s current fiscal slip translates to nothing more than a minor blip in the trajectory of a nation that has tremendous potential for many investors.

Kevin Daly, a portfolio manager on the emerging-markets fixed-income team at Aberdeen Asset Management in London, is bullish on Ghana. An investor in the country’s 2007 sovereign bond, which he bought during the 2008 market downturn and then sold when it began to trade at lofty prices, he believes the country’s fiscal problems are just a one-off and will be corrected in due course.

“I was in Ghana last November, and I have no issues or concerns to pick on aside from the fiscal slippage,” he said. “Yes, the country’s debt is now 47% of GDP, so one could argue that the debt trajectory is going the wrong way, but Ghana’s oil and gas production is going to increase, which should offset the rising debt, and the new government should be pretty sensible in terms of policy.”

Ghana’s government is committed to reducing the twin fiscal and current account deficits and will also reduce public-sector wages, which were greatly increased in the run-up to the elections to appease the population, said Larry Seruma, principal at Nile Capital Management in New York, who has just returned from Ghana.

“The Ghanian currency, the cedi, depreciated by 20% in 2012, but the three-year bond yields have also fell dramatically to 16%, so that has stabilized the currency and greatly helped the current account deficit,” he said.

Even so, Ghana is a fortunate nation because oil output remains the single largest driver of the economy and a highly profitable safety net for the country. In 2012, Ghana’s oil production averaged 80,000 barrels a day, but by the end of December, that number had gone up to 110,000. The country aims to reach full production capacity of 120,000 barrels a day this year, which should be no problem, Seruma said, and revenues will boost government finances significantly.

Markets are expecting Ghana to issue bonds again this year— not a bad idea, Altenkirch said, since domestic funding costs are so high. But “going into the Eurobond market means funds raised need to be used well and for targeted projects,” he said.